This article is adapted from AQ’s latest issue on China and Latin America | This piece has been updated
While the U.S. and allies distance themselves from Chinese tech companies such as Huawei, China has become Latin America’s top investor of its booming technological sector. Tencent invested $180 million in Latin America’s top unicorn company, Brazilian fintech firm Nubank. Large Chinese companies have acquired local startups, such as Didi Chuxing purchasing Brazil’s 99 Taxis and initiatives such as Chinnovation, which pairs up Latin American and Chinese tech investors, signal this trend will only increase. Even Baidu’s discontinued $60 million fund for Brazilian startups last year, left the country saying they intended to continue to invest but directly from their home front.
Chinese investment in regional companies has been accompanied by deep penetration of its own firms. Telecommunications companies such as Huawei and ZTE have largely integrated into the region. Noticias Águila, Mexico’s most downloaded news app, was created by a Shenzhen-based company. Huawei is one of the top contenders to build a fiber-optic cable connecting Chile to Asia, is already building one connecting Sinaloa to Baja California Sur in Mexico for $14 million, and like Alibaba will be competing with Amazon by setting up data centers in Chile.
Where Chinese companies go, allegations of espionage, hacking, and unscrupulous business practices usually follow. In Poland, a senior Huawei employee was arrested in January for allegedly spying on the Polish government. In the UK, the British government found evidence that the company’s telecommunication equipment could be compromised. Despite the risk, Huawei is the contractor of choice to build digital infrastructure like 4G mobile networks across a broad swathe of Latin America.
The complex nature of telecommunications means changing suppliers is easier said than done once a company builds your mobile network. This over-reliance means that Huawei can afford to drag its feet in addressing the security concerns of governments. Indeed, after the UK raised issues with the security of the equipment, the company said it would take five years to address the country’s concerns.
Furthermore, companies such as ZTE have exported surveillance technology to Bolivia, Ecuador and Venezuela. While these systems are geared towards natural incidents and cutting crime, they can lead to breaches of citizens’ private information, increased censorship and new tools for authoritarians. In Venezuela, ZTE is helping the Maduro’s government build a national identification system that can help the embattled government crackdown on dissent.
The Cybersecurity Gap
In case these risks come to fruit, Latin American countries may not have as strong capabilities to defend themselves unless they continue to develop their own infrastructure. A lack of cybersecurity infrastructure has led to an unfortunate amount of increased risks. In 2017, Latin America suffered from 677 million cyberattacks, a 59% increase from the previous year that cost the region $97 billion.
There are some initiatives to address this gap. Chile is executing its first national cybersecurity strategy to be completed by 2022 and created a Computer Security Incident Response Team (CSIRT). Mexico started to improve its financial sector cybersecurity after losing $15 million over the course of two months in 2018 to hackers exploiting third-party vulnerabilities. And the number of credit scoring, identity, and fraud management companies in the region increased by 571% from 2017 to 2018.
Strengthening and implementing intellectual property and cyber governance laws will boost innovation. Weak cyberinfrastructure both decreases the ability for countries to defend their businesses and national interests and limits technological development in the region. Implementing strong cyber laws that are also adaptable to quick technological change, as well as creating national and regional cybersecurity frameworks, as well as China strategies, would be key.
Finally, more support should be given to existing tech startups. Only 32% of Latin American fintech startups have a presence abroad and their average number of employees is only 15. Currently, Latin America has several great incubators–even some that have been running for over two decades, such as Colombia’s CREAME. Technological parks, however, are still few and far in between.
Overall, Chinese tech companies and investment can present a strong opportunity for Latin American countries–if they don’t open themselves up to the risks.
This article was updated to reflect Baidu’s decision to discontinue their Brazilian start-up fund, Easterly Ventures, in 2018.
Cote-Muñoz is a Research Associate for Latin America Studies at the Council on Foreign Relations, one of four Latin Americans in the inaugural class of China and Latin America Young Scholars for the Inter-American Dialogue. You can follow her on Twitter at @ncotemunoz. Laskai is a China and emerging technologies Research Associate at the Council on Foreign Relations.